Nifty50 Valuation Drops to Below 5-Year Average on FPI Selling Spree

Amid sustained selling pressure, the valuation of the Nifty50 has slipped below the five-year average of 18.82 times one-year forward earnings for the first time in 14 months.

For the first time in two years, equities in Asia’s third-largest economy have entered the technical correction phase marked by an over 10% fall in the benchmark from the recent peak.

However, the selling pressure is partially offset by the buying support from domestic investors. In the five months to February, foreign portfolio investors (FPIs) pulled out nearly $13 billion (97,000 crore) from Indian equities while domestic investors poured in around $14 billion (Rs1.05 lakh crore). This has been the prime reason for the lesser decline in Indian equities compared with the other emerging markets (Ems).

The Russian index fell the most by 52% from the peak followed by Hungary (19% drop), Turkey (18%), and Brazil (13%). The Nifty has so far lost 12% from the peak.

Due to the current weakness in the market, nearly 50% of the Nifty stock now trade below their 10-year average P/E multiples. These include stock such as ONGC, Coal India, Tata Steel, NTPC and SBI.

Information technology continues to be the most richly valued sector in the Nifty. In the case of the broader market, 37% or over one of every three Nifty 500 constituents have declined over 30% from their 52-week highs. This points at the unwinding of trading positions in the small cap and mid-cap segments due to rising global uncertainty.

Indian equities enjoy a valuation premium of 20% to the world equities and 79% to the EMs. This may shrink if FPIs continue to reduce exposure to India and other EMs.

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